New Tax Legislation

 Re: HIRE Act: Incentives to Hire and Retain the Unemployed  

In an effort to confront high unemployment, the Hiring Incentives to Restore Employment (HIRE) Act provides incentives for hiring and retaining unemployed workers. Under the HIRE Act, a qualified employer's 6.2 percent share of OASDI Social Security tax liability is forgiven for new hires, and a general business credit is allowed for each retained worker that satisfies a minimum employment period. 
 
Payroll Tax Forgiveness for Hiring Unemployed Workers. The HIRE Act provides relief from the employer share of OASDI taxes on wages paid by a qualified employer with respect to certain covered employment. Covered employment is limited to service performed by a qualified individual in a trade or business of a qualified employer, or in the furtherance of the activities related to the purpose or function constituting the basis of the employer's exemption under Code Sec. 501. This provision applies to wages paid beginning on the day after enactment and ending on December 31, 2010. 
 
Although a qualified employer does not include the United States, any State, any local government, or any instrumentality thereof, a qualified employer may include a public higher education institution. 
 
A qualified individual is any individual who: 
 
1.      begins work for a qualified employer after February 3, 2010, and before January 1, 2011;
2.      certifies by signed affidavit (under penalties of perjury) that he or she was employed for a          total of 40 hours or less during the 60-day period ending on the date employment  begins;
3.      is not employed to replace another employee of the employer unless such                                    employee  separated from employment voluntarily or for cause; and
4.      is not a related party.
 
 
Employers who qualify for the OASDI forgiveness in the first quarter of 2010 will receive the benefit through a credit toward general second quarter 2010 OASDI liability; they can't simply stop paying the 6.2 percent OASDI tax immediately on wages paid to new hires. After the first quarter, however, the employer does not pay the 6.2 percent tax as wages are paid. 
 
A qualified employer may not receive the work opportunity tax credit on wages paid to an individual during the one-year period beginning on the hire date for the same wages used to qualify for the forgiveness of payroll tax. However, an employer may elect to not have payroll tax forgiveness apply. 
  
Business Credit for Retention of Certain Newly Hired Individuals. Under the HIRE Act, an employer's general business credit is increased by the lesser of $1,000 or 6.2 percent of salary for each retained worker that satisfies a minimum employment period. Generally, a retained worker is an individual who is a qualified individual as defined for purposes of the provision for payroll tax forgiveness. However, the credit is available only with respect to such individual, if the individual: 
 
1.      is employed by the employer on any date during the tax year;
2.      continues to be employed by the employer for a period of not less than 52 consecutive               weeks; and
3.      receives wages for such employment during the last 26 weeks of such period that are at           least 80-percent of such wages during the first 26 weeks of such period.
 
Therefore, an employer will qualify for the full $1,000 credit for each new hire with a salary over the 52 retention period of at least $16,129. An employer that hires some part-time new employees, in addition to full-time employees, is entitled to the full $1,000 credit, if, of course, the part-time or full-time employee decides to stay for 52 weeks. 
 
Because payroll taxes are deductible as an ordinary and necessary business expense, employers may have a correspondingly smaller business expense deduction on their 2010 tax returns. By combining the benefit of the business credit for new hires with the forgiveness incentive, employers in the highest brackets will realize a net tax benefit of just over four percent of wages paid to qualified new employees, up to the $106,800 social security maximum wage base. Therefore, for the maximum $6,621.60 tax forgiveness for a new hire, a net benefit of approximately $4,304 would be realized. 
 
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Re: Dealing with Health Care Reform's New Tax Laws:
The Health Care and Education Reconciliation Act of 2010
 
Now that Congress has passed a landmark health care reform package, much work needs to be done in dealing with new requirements. While the end result of the legislative process is necessarily health care related, the tax law plays a major role in its implementation. From the tax credits and subsidies used to expand health coverage, to the many penalties, fees and surtaxes designed to pay for it, the Tax Code is front and center. 
 
Two new laws.  Health care reform is actually made up of two new laws: the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010. The Patient Protection Act was crafted largely in the Senate and sets out the general framework of health care reform. The Reconciliation Act was prepared in the House to modify the Patient Protection Act, especially in the areas of tax credits and cost sharing for individuals to help make coverage more affordable. Common features to both laws are delayed effective dates for many of the provisions, which make strategic planning all that more important. 
 
New taxes and penalties.  Viewing the historic health care reform package from the context of the Tax Code, many new taxes and penalties stand out immediately above the rest. Initially, we would advise taking particular note of the following highlights: 
  • Individuals who earn more than $200,000 for the year ($250,000 for married couples) will   be paying an additional 0.9 percent in Hospital Insurance (Medicare) tax, starting in 2013;
  • Individuals whose adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers), whether from wages or otherwise, will also be paying an additional 3.8 percent Medicare tax on net investment income, starting in 2013;
  • Employers with 50 or more employees generally will be required to provide a minimum level of health insurance for their employees or pay a penalty per employee, starting in 2014;
  • Small employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees, starting immediately in 2010;
  • Most individuals will be required to obtain health insurance or be subject to a penalty tax starting in 2014;
  • Tax credits to subsidize the cost of health insurance premiums will be available to individuals earning up to 400 percent of the poverty level, starting in 2014;
  • Health flexible savings arrangement (FSA) dollars will be limited to prescription medications with some exceptions after 2010, along with placing a $2,500 annual cap on expenses covered under health FSAs, starting in 2013;
  • A 40 percent excise tax will be imposed on high-cost, "Cadillac" employer-sponsored health coverage, starting in 2018;
  • Fees will be imposed on the pharmaceutical industry and health insurance providers , starting in 2011 and 2014, respectively;
  • An excise tax will be imposed on medical device manufacturers after 2012; and
  • Limits on tax-subsidized medical expenses will be imposed by raising the itemized medical expense deduction floor for regular tax purposes from 7.5 percent to 10 percent, generally starting in 2013
Tax incentives.  Among a handful of tax incentives provided under the new health-care reform package, two are particularly notable at this time: (1) the ability of parents to cover adult children up to age 27 under their tax-qualified employer-provided health plans, starting immediately for plans that elect to beat the mandatory post-September 22 year deadline for doing so; and (2) the unveiling of a simplified cafeteria plan specifically tailored to small businesses, starting in 2011. 
 
Exchanges.  The health care reform package requires each state to establish an exchange by 2014 to help individuals and qualified employers obtain coverage. Coverage will be offered at various levels. Qualified individuals may be eligible for premium assistance tax credits, cost-sharing or vouchers to help pay for coverage through an insurance exchange. An individual's income, whether or not coverage is provided by his or her employer, will all be taken into account when determining if the individual qualifies for a premium assistance tax credit, cost-sharing or voucher. 
 
IRS guidance.  Over the course of the next few months, the IRS and other federal agencies will be filling in details on how to comply with all the provisions under the massive health care reform package. The IRS is expected to issue guidance soon on the provisions with effective dates in 2010 and 2011. 
 

Our office will be staying on top of all developments, with an eye toward how to best maximize results under the new law for our clients. We are prepared to advise our clients on all compliance rules and tax-reduction opportunities that undoubtedly will arise. In the meantime, if you have any questions about the new laws, please do not hesitate to call our office.